Is Now the Time To Buy These Aerospace And Defense Stocks?

Morgan Stanley analyst Kristine Liwag released a research note on the aerospace and defense industry, highlighting three companies to own going into earnings season:

• Transdigm Group, Inc. TDG
• Northrop Grumman Corp. NOC
• Textron, Inc. TXT

The Transdigm Takeaways: Transdigm Group operates in the aerospace aftermarket, developing and manufacturing engineered aircraft components.

Increased airplane maintenance drives growth in the aftermarket sector of the aerospace industry, Liwag said in the Friday note. 

The analyst cites TSA throughput levels relative to 2019 as a sign of the return of domestic airline travel, indicating several tailwinds for increased aircraft maintenance.

Transdigm will benefit from proactive maintenance as airlines plan for increased travel and servicing on aircraft used through the pandemic, she said.

“The company’s leverage as a sole sourced provider, paired with increased demand, puts it in a strong position to control pricing and expand margins,” Liwag said.

Further, the company notes in its SEC filings that the aftermarket generates “approximately 49%” of net sales, produces higher margins and is more stable than other segments.

Liwag maintained an Overweight rating on Transdigm with a $762 price target.

The Northrop Grumman Takeaways: Following President Joe Biden’s election, the market turned bearish on the defense sector, as many assumed the Democratic shift would mean a decrease in military spending, said Liwag. Surprisingly, the Pentagon’s requested budget for FY22 is 1.6% higher than the enacted FY21 budget, signaling stability in the U.S. military budget, she said.

Northrop Grumman is poised to benefit from increased budget allocation — namely a 5% increase in the budget for B-21 aircraft, an 8% increase in space funding and an 86% budget increase for the Ground-Based Strategic Deterrent program, according to Morgan Stanley.

Additional catalysts for Northrop Grumman include the 20% P/E discount at which the defense sector trades relative to the S&P 500 and the company’s $2-billion share repurchase program, said Liwag.

Liwag maintained an Overweight rating on Northrop Grumman with a $478 price target.

The Textron Takeaways: Liwag named three indicators of growth in mid-sized business jet demand, a key Textron product line and a driver of top-line growth:

• A positive correlation of medium-sized business jets to U.S. non-residential spending
• Fewer city pairs in the U.S. that provide limited mobility in lower population states
• Strong demand from first-time business jet users

Read more about Textron’s growth indicators here.

Liwag upgraded Textron from Equal-Weight to Overweight with an $87 price target.

TDG Price Action: Transdigm was down 0.78% to $648.56 at the close Tuesday.

NOC Price Action: Northrop Grumman was down 0.79% to $367.39.

TXT Price Action: Textron was down 1.81% at $66.69.